Summers​ shameless assault on MMT

5 Mar, 2019 at 14:38 | Posted in Economics | 15 Comments

First,​ it was Paul Krugman. Then came Kenneth Rogoff. And now Lawrence Summers has felt the urge to attack MMT and defend mainstream economics:

summersThere is widespread frustration with the performance of the economy … Altered economic conditions have led to the development of new economic ideas … And now, these new ideas are being oversimplified and exaggerated by fringe economists who hold them out as offering the proverbial free lunch: the ability of the government to spend more without imposing any burden on anyone …

Modern monetary theory is fallacious at multiple levels. First, it holds out the prospect that somehow by printing money, the government can finance its deficits at zero cost … Second, contrary to the claims of modern monetary theorists, it is not true that governments can simply create new money to pay all liabilities coming due and avoid default …

For neither the right nor the left is there any such thing as a free lunch.

Larry Summers

Now compare that to what the same Summers wrote​ just a couple of years ago:

IMF asserts that properly designed infrastructure investment will reduce rather than increase government debt burdens. Public infrastructure investments can pay for themselves … Infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment … The IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time …

What is crucial everywhere is the recognition that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions.

Larry Summers

Now isn’t that strange? What appeared to be a great idea less than five years ago, all of a sudden turns out to be bad. The free lunch is not — after all — free …

When the economics establishment is questioned and challenged, the high priests close ranks. Ideas that were considered great transmute into bad when they turn out to be connected with heterodox theories that challenge the hegemonic theory …

15 Comments

  1. “Presumably government-guaranteed jobs will produce more goods thus increasing supply to lower inflation,” No – wages will be anchored around the ELR price, stabilizing prices while making sure there is a socially useful activity with a living wage for all who want it. Inflation is not an issue – name a time/place where a peacetime stable currency issuer has caused problematic price rises from government spending? Deflation the worry, especially once finance and the credit-impulse is reined in. But public projects easily re inflate the economy.

    Comment by Clint Ballinger— 7 Mar, 2019 #

    • I share Black’s view of inflation (from his 1986 essay, “Noise”):
      .
      “the price level and rate of inflation are literally indeterminate. They are whatever people think they will be. They are determined by expectations, but expectations follow no rational rules. If people believe that certain changes in the money stock will cause changes in the rate of inflation, that may well happen, because their expectations will be built into their long term contracts.”
      .
      Inflation swaps allow both counterparties to hedge inflation risk. The Fed can manage inflation by serving as counterparty of last resort for inflation swaps, and by indexing incomes and savings to price rises thus maintaining real purchasing power.

      Comment by Robert S Mitchell— 7 Mar, 2019 #

  2. MMT is orthodox because it subscribes to the Quantity Theory of Money and ignores new net financial assets created by the private sector without transacting with government institutions first. If only MMT said what Sumners says it does! But MMT says you raise taxes to fight inflation by soaking up excess money. Again, this is mainstream Quantity Theory that ignores vast volumes of privately-created capital.

    Comment by Robert S Mitchell— 5 Mar, 2019 #

    • MMT ignores no such thing. No, new net financial assets are not created by the private sector. Robert has his accounting wrong, us usual.
      Yes, credit money should be reduced, and Mosler has put out by far the best proposals for how to do so here http://moslereconomics.com/2009/09/16/proposals-for-the-banking-system-treasury-fed-and-fdic-draft/

      1000 CASTAWAYS: Fundamentals of Economics
      https://clintballinger.wordpress.com/

      Comment by Clint Ballinger— 6 Mar, 2019 #

      • Please see JP Morgan’s “Derivatives and Risk Management Made Simple” https://www.jpmorgan.com/jpmpdf/1320663533358.pdf pages 6 and 7:
        .
        “if set up correctly the net position of the funding status will remain unmoved and thereby the position is hedged.”
        .
        They have balance-sheet examples of inflation and interest rate swaps.
        .
        The key thing that MMT ignores is that the swap contract itself becomes a new net financial asset. If one side sells that new net financial asset, all associated liabilities are moved off its books. It is a new dollar-denominated asset that represents a claim on the Fed before the Fed knows about it.

        Comment by Robert S Mitchell— 6 Mar, 2019 #

    • To be fair to MMT, they include a Job Guarantee in inflation-fighting. Presumably government-guaranteed jobs will produce more goods thus increasing supply to lower inflation, or something like that. I would rather dispense with the Quantity Theory excuse for raising taxes, and have governments encourage self-provisioning without requiring jobs and bosses overseeing production. Rather than a job guarantee, a basic income can provide people an opportunity to produce what they need themselves, thus reducing reliance on market structures such as hierarchical employment.

      Comment by Robert S Mitchell— 6 Mar, 2019 #

      • Basic income doesn’t provide opportunity; liberty to access opportunity without having to pay anyone else for permission to do so does. If the poor are given money, their landlords will just charge them higher rents. So what people should get is not no-strings cash, but only what has been taken from them by force and made into the private property of the privileged: their rights to liberty. If people had the liberty to access economic opportunity without having to pay a private landowner or other privilege holder for permission to do so, they would be able to support themselves. It is the rich, greedy, privileged parasites riding on their backs that they can’t support, not themselves or their families.

        Comment by Roy Langston— 6 Mar, 2019 #

        • “If the poor are given money, their landlords will just charge them higher rents.”
          .
          The private sector way to solve this problem is to increase incomes faster than prices rise.

          Comment by Robert S Mitchell— 8 Mar, 2019 #

  3. Dear Lars,
    What about this critique of MMT by Thomas Palley, from another fraction of Keynesians (Popular Front of Keynesians? 😉

    http://thomaspalley.com/?p=1145

    Comment by Jorge Morales Meoqui (@MoralesMeoqui)— 5 Mar, 2019 #

    • Thomas Palley: “. . . governments are different from households. They have the ability to borrow from future generations”
      .
      This statement from Palley was very disappointing to me. My ear hears this as rhetoric endorsing the idea that public borrowing today imposes burdens on posterity: the future pays back the debt we in the present incur with some future sacrifice.
      .
      It is nonsense and people need to know that it is nonsense. If the future does choose to extinguish the debt the present has created, the future will only be extinguishing pieces of paper with other pieces of paper, or keystroke for keystroke. Nothing about borrowing (by a monetary sovereign in its own currency) in the present commits the future to any particular course of action or consequence. Public spending today may enable the present to fully utilize the opportunities of the present moment, opportunities that the future can never recover once lost.

      Comment by Bruce Wilder— 6 Mar, 2019 #

  4. What “free lunch”? We need skilled workers, raw materials, etc. Those things don’t grow on trees, Larry.

    Comment by AlexHache— 5 Mar, 2019 #

    • You spend more on security preventing free access to abundant resources than on producing things. Enclosure has created the Tragedy of Privatization, where what was once free becomes priced and money is kept scarce for some by policies that make money scarcity a proxy for assumed model-critical scarcity.

      Comment by Robert S Mitchell— 6 Mar, 2019 #

  5. There is a certain predictable amount of backlash from mainstream economists on MMT. This was only to be expected. As far as I am concerned MMT is also basically very simple. Government can have money created to fund public expenditure on a variety of vital projects notably infrastructure ones. Taxation in MMT is only used as a means of reducing the amount of money in the economy, and hence inflation. I regard MMT as a big step in the right direction. But it is only the beginning stage in which the economy could ultimately be tracked in real-time, or near real-time so that more, and more new money can be safely transmitted to fund various projects. This New Paradigm is known as Transfinancial Economics… in its Advanced Stage. The Primary Stage of TFE is very much like MMT…and hopefully it may become reality as soon as is possible.

    Comment by Robert Searle— 5 Mar, 2019 #

  6. ” have led to the development of new economic ideas … And now, these new ideas”

    New ideas? What time frame is ‘new’?!? Tick-tock Kalecki, Abba P Lerner, Keynes, Minsky, Godley etc?
    2003 was the first time i went to an MMT talk Bill was in a good old Aussi Politics in the Pub. Was the discontent for the great recession then Mr Summers.
    Even the phrase “free lunch” is from a flat-earther economist what’s his name Friedman. So there you go out to pontificate with all the rote learned emotive terms. Engage us on a balance sheet or empirical or engineering based paradigm? Didnt think so 😉

    Comment by sam w— 5 Mar, 2019 #

  7. it holds out the prospect that somehow by printing money, the government can finance its deficits at zero costb

    The tired cliches of vulgar economics are always marshalled in these critiques. The “printing money” metaphor ought to embarrass Summers for confusing currency with money, a fundamental error, even in the mainstream.

    Comment by Bruce Wilder— 5 Mar, 2019 #


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